Not-A-Pundit: The Renaissance

With the Federal Reserve seemingly leaving interest rates on hold at levels tolerable to the market and crude oil still well below last summer’s peak, many analysts and traders look for the recent upward momentum to continue in stock-index futures.

Some point out, however, that the market remains sensitive to U.S. economic data, with the potential for a pullback on any worrisome signs.

Most appear to look for the June S&P 500 futures to climb above 1,500 in the next several weeks or months.

The June S&P contract settled at 1,466.40 on Friday, at the end of a busy U.S. economic week that included a Federal Reserve meeting, gross domestic product data, two manufacturing diffusion indexes and the monthly employment report. Based on a monthly spot continuation chart, the S&P futures hit their loftiest levels since late 2000.

In the absence of any bearish economic developments or a big jump in crude oil, “a trend in motion stays in motion,” said George DeMarcilla, vice president and analyst with Alaron Trading.

DeMarcilla said the market appears satisfied that the Federal Open Market Committee has left U.S. interest rates on hold since last summer.

“It looks as if the Fed will probably err on the side of no further rate hikes at the moment,” DeMarcilla said. “That being the case, there is no impediment for the market to (stall and) go lower.

DeMarcilla said energy prices are lower compared to six months ago. “You have interest rates that appear to be stabilizing, with the possibility that the next move from the Fed may actually be a rate cut rather than a rate hike,” he said.

A similar view was expressed by Frank Lesh, futures analyst with Future Path Trading.

“Right now, for the first half – if things stay the way they are – I’m expecting steady to higher prices,” said Lesh.

The Fed may well be on hold for the first half of the year, and maybe even for all of 2007, according to Lesh.

“Right where we’re at now, they’re okay with it,” he said. “As long as the Fed isn’t raising rates, equities are fine. They’d maybe like to see them (rates) lowered. But here we are with a steady Fed and the S&Ps at new (several-year) highs.”

A several-month pullback in crude oil has been constructive for stocks, said DeMacilla. A daily spot continuation chart shows that oil fell from roughly $80 a barrel last summer to around $50 in early January. It has been ticking higher since, but remains about 25% below the peak from last summer.

“The lower energy prices are almost the equivalent of a rate cut,” said DeMarcilla.

There are always unknowns, such as interest rates, the economy and whether any major terrorism incidents will occur, said Lesh.

“The economy – it’s a tough call,” he said. “We’ve still got a lot of people who think that the housing market is going to be a problem. The data is not necessarily confirming that right now. And there is another side where people think maybe we saw the slowdown already.”

Some of the recent economic data reflected favorably on the economy, while others were more worrisome. The government’s first estimate of fourth-quarter GDP growth was an annualized rise of 3.5%, a half point more than the market was expecting. January non-farm payrolls rose 111,000, short of the 155,000 forecast. Yet, some pundits were still calling the report strong, since the December and November job gains were revised upward by a collective 81,000.

Meanwhile, a couple of closely watched diffusion indexes were below the key 50-point level that is generally seen as the breaking point on whether the manufacturing economy is expanding or contracting. The Chicago Purchasing Managers Index fell to 48.8 in January from 51.6 in December, and the Institute for Supply Management’s index retreated to 49.3 in January from 51.4 in December. The pre-report forecast for both reports was 52.

Larry Young, senior trader with Infinity Brokerage Services, looks for more gains in stock-index futures in the first quarter, with the S&P futures perhaps topping 1,500, the Nasdaq futures 1,900 and the Dow futures above 13,500. However, he then anticipates a pullback starting in the second quarter.

The market lately has been underpinned by mostly decent corporate earnings, allowing momentum-based activity, he said.

“But I think there are some other variables that are going to come into play during the second part of the year,” said Young. In particular, Young fears a slowdown of U.S. consumer spending, hurt by the housing market and potentially more defaults on home and car loans.

The extent of any pullback will hinge on just how much consumer weakness occurs, he said. Another wild card could be commodity prices, he said. Any spike in oil or grains could affect consumers’ bottom line and thus hurt stocks.

“This whole year is going to be based on sentiment and perception,” he said.

Technically, said DeMarcilla, some major resistance for the June S&P lies around 1,474. Should the market break through here, he said, gains may well accelerate.

“All indications suggest the market could run up until the middle of the year,” he said. “There could be some pullbacks, but overall the technical picture remains firm and is pointing higher.”

In fact, DeMarcilla thinks it is possible for the S&P futures to make a double-top around 1,574. A monthly continuation chart shows they peaked at that level in March 2000.

“On a shorter-term basis, we’re a little bit overextended right now,” said DeMarcilla. “So I wouldn’t be surprised if we pull back in here. But unless a pullback is accompanied by major volume and some very negative news – which I don’t see coming – it may not do that much damage.”

Should the futures turn lower, however, he put support levels at 1,380, 1,331 and 1,315.

Lesh, meanwhile, listed potential upside targets of 1,503 to 1,505, then 1,574 to 1,583, all based on a weekly chart. He put potential support levels at 1,367, 1,337, 1,290 and 1,151.